Short Sale Flipping: Today’s Equivalent Of California Gold Rush?

The Washington Independent reports:

• With home prices continuing to fall and more foreclosures yet to come, it’s clear that tough times remain for a housing market recovery. And to add to the troubles, another threat to any rebound is emerging: mortgage fraud.

• Interthinx, [a firm] which analyzes mortgage fraud nationally, and uses its risk measure to show where it may be increasing the most, found a continuing shift to schemes involving bank-owned foreclosed homes, and short sales, in which an owner sells the house for less than what’s owed on the mortgage and the lender forgives the remaining debt. The firm also reported that real estate agents and other professionals increasingly are involved in the schemes, which are growing in popularity due to the abundant supply of foreclosures, and the fact that appraisals frequently aren’t required in order to sell distressed properties.

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• Flipping properties isn’t illegal, but it can involved fraud in several ways, explained Ann Fulmer, vice president of business relations for Interthinx. It’s when a seller never mentions higher offers on the table from bona fide purchasers, or fails to disclose that the seller already has a contract with a buyer for a higher price. Red flags sometimes should be raised when borrowers use transactional funding, which means essentially renting someone else’s money for one day, in order to appear in a stronger financial position. Then there’s the use of land trusts – they’re not illegal, in and of themselves. Land trusts are organizations created to purchase and hold real estate. But short sale gurus are advising investors to set them up to evade FHA anti-flipping rules, and to hide the true borrower’s identity, which can amount to fraud.(1)

• “Short sale flips are today’s equivalent of the California gold rush,” Fulmer wrote recently. She and other mortgage experts noted that banks already are on to some of the schemes. In some cases, banks are requiring everyone involved in a transaction, from the real estate agent to the mortgage broker, to sign affidavits swearing they have aren’t [sic] in the flipping business with anyone else involved in the sale.(2) [Guy] Cecala, [publisher] of Inside Mortgage Finance, said federal law enforcement agents also are moving more aggressively even on smaller cases of mortgage fraud, unlike during the housing boom, when only major cases drew attention.(3)

For more, see Mortgage Fraud Threatens Housing Rebound (Taxpayers, Communities Ultimately Hit When Banks Get Scammed).

(1) See EzineArticles.com: Land Trusts - The Answer to Flipping Short Sales?

(2) For one perspective on illegal short sale flipping, see National Mortgage News: The Gold Rush of 2010.

(3) For examples of recent federal indictments involving alleged fraud in connection with short sale flipping, see the following U.S. Attorney press releases:

• Bridgeport, Connecticut: Two Connecticut Real Estate Agents Charged with Engaging In Short Sale Mortgage Fraud Schemes (Feds indict two in alleged short sale flipping scam using straw buyers to dupe lenders into accepting less than full payment on underwater loans),
• New York City: Manhattan U.S. Attorney Charges 41 Defendants In Coordinated Mortgage Fraud Takedown Across New York State (pages 4-5) (Feds describe short sale flipping deals and sale leaseback foreclosure rescue arrangements in one recent indictment of ten suspects; for the indictment, see U.S. v. Bills, et al.),
• Phoenix, Arizona: Foreclosure-Rescue Schemers Indicted (Feds indict pair in alleged scheme abusing HUD "short sale" program to pocket illegal profits by flipping homes facing foreclosure).